Behind the Curve

The European Central Bank is behind the curve on tackling record euro-zone inflation and will have to act more forcefully than earlier envisaged to wrest control of prices, according to a survey of economists. Despite a surprisingly big increase in interest rates in July, more than two-thirds of respondents say officials have acted too slowly in battling inflation that’s just hit 9.1%. They now predict a higher end-point for the cycle of hikes, reached more quickly and including a 75 basis-point step on Sept. 8. Meanwhile, a planned emergency intervention in European power markets may lower prices but won’t protect the region’s economy from the spillover effects of a historic energy crunch, according to the bloc’s executive arm. Russia is crimping gas supplies as it continues its war in Ukraine.

Slumping Bonds

Global bonds slumped into their first bear market in a generation, hurt by rapid interest rate hikes in many economies to quell historically high inflation. The Bloomberg Global Aggregate Total Return Index of government and investment-grade corporate bonds has fallen more than 20% below its 2021 peak, the biggest drawdown since its 1990 inception. And Treasuries could succumb to more losses later Friday when the US releases a keenly awaited jobs report, as a solid number would boost expectations of another large Federal Reserve rate increase. That could, in turn, roil assets like equities given that the Fed’s goal is to put a brake on economic activity to get price pressures under control. 

Biden Versus Trump

President Joe Biden is seeking to stoke voters’ outrage over the extremism of Donald Trump and his supporters ahead of November’s midterm elections, even if the strategy risks exacerbating political tensions in the US. In a prime-time address to the nation Thursday from Philadelphia’s Independence Hall, Biden sharpened the criticism he’s recently used to describe his predecessor and Trump supporters. Declaring that “equality and democracy are under assault”  from “extremist” Republicans, he implied that the only way to stop them was to vote against Republicans who support the former president. Before the Thursday speech, House Republican leader Kevin McCarthy delivered a rebuttal in which he accused the president, not Trump, of inflaming divisions. 

Inflation and War

The risk of civil unrest has spiked across the globe as developed nations and emerging markets alike grapple with spiraling inflation and upheaval exacerbated by Russia’s invasion of Ukraine, according to a report. Of 198 countries tracked in the Civil Unrest Index, 101 showed mounting risk in the third quarter of 2022, according to research collected by intelligence firm Verisk Maplecroft. That’s the biggest increase since the ranking was developed in 2016. The potential for unrest is rising across Europe, which is bracing for a long winter of energy disruption because of the war in Ukraine — as well as the developing world, where price spikes on basic staples have triggered concerns of a global food crisis. The threat is set to grow over the coming months, researchers say. 

Coming Up…

Stocks are in something of a holding pattern before the critical US jobs report, while a dollar gauge is near a record high in a sign of investor caution. Other expected data include Germany’s trade balance and Spain unemployment. The UK leadership ballot closes this evening. The Ambrosetti Forum kicks off in Italy. Emerging market asset manager Ashmore delivers earnings after flagging in July that its assets under management plunged to a five-year low.

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(Source: Bloomberg, Sept. 2-2022)